Venrock in the News

Category Archives: Insights

Chris Chen, CEO of ChenMed, joins Venrock’s Bryan Roberts to discuss the challenges and successes of providing healthcare to the population that needs it most – the poor, the old, and the sick. Chris’s father, James Chen, founded ChenMed as a way of providing concierge-style healthcare to low- and moderate-income seniors. When his father faced a health scare, Chris spent 24 hours learning how to run the business. After his father recovered and Chris completed his fellowship, they expanded ChenMed to 42 medical centers and significantly decreased hospitalization rates of their patients. With cardiovascular, oncological, and orthopedic diseases plaguing his patient population, Chris emphasizes the importance of holistic healthcare practices and collaborating with doctors who understand the economics of healthcare. Although wanting to cure the world may be his kryptonite, Chris shares how staying focused allows him to help those who need it the most.

Noah Lang, CEO and co-founder of Stride Health, joins Venrock’s Bob Kocher to discuss the changing nature of work, and how his company is helping independent workers successfully create a “business of one.” Lang recalls his childhood love of building and creating, and how it led him to study product design at Stanford and later launch Stride Health. Stride Health delivers a toolkit that helps independent workers find healthcare coverage and other benefits that workers outside of traditional 9-5 jobs do not typically receive. This shift towards independent employment has fueled Lang’s passion for helping these workers keep more of what they earn and thrive in their businesses. Lang also shares how running and guidance from his coach have helped him continue to improve as a first-time CEO.

Chris Lochhead, a three-time Silicon Valley CMO, co-author of Play Bigger, and former entrepreneur, joins Brian Ascher of Venrock to discuss the importance of category design and marketing on this week’s episode of Running Through Walls. From having a provocative point of view to not accepting the status quo, Chris outlines what every business needs to do to become a category king. He discusses the right time to think about category design, whose job it is, and why concentrated campaigns called “Lightning Strikes” will grab the attention of consumers more effectively than traditional marketing.

Peter Lee, executive director for California’s health benefit exchange Covered California, joins Venrock’s Bob Kocher to discuss working with Washington and Peter’s goal of making healthcare a right, not a privilege. Lee started his career as a lawyer and became an AIDS/HIV activist in the 1980s. Peter humorously recalls the time he was arrested outside the Reagan White House for protesting the government’s lack of responsiveness to the AIDS epidemic, and how he had to disclose that story when he worked on the Affordable Care Act under the Obama Administration. Peter shares how he grew Covered California from 13 employees to 1,600, and how he allocates his $110 million marketing budget to successfully target specific consumers. Peter also speaks to the importance of creating a mission that employees believe in, and how he fosters a sense of start-up culture within the government.

Venrock has a 40-year history of investing across technology and healthcare, including more than a decade at the intersection of those two sectors. Earlier this month we expanded our technology investing team with the addition of Tom Willerer. Continuing to increase the depth and breadth of Venrock’s value-add to entrepreneurs, we are honored that DJ Patil is joining Venrock as an Advisor to the Firm.

According to DJ, “Venrock has a long and incredible history of helping entrepreneurs create new categories – Apple; Cloudflare; Dollar Shave Club; Gilead; Illumina; Nest; Athenahealth. Given their experience across healthcare and technology, they are well-situated to help build an entirely new generation of data science/AI, healthcare, security, as well as consumer and enterprise internet companies. I have known this team for years and am eager to help their effort going forward.”

Best known for coining the term “data science”, DJ helped establish LinkedIn as a data-driven organization while serving as the head of data products, Chief Scientist and Chief Security Officer from 2008 – 2011. DJ spent the last several years as the Chief Data Scientist of the United States, working in the White House under President Obama. The first person to hold this role, DJ helped launch the White House’s Police Data Initiative, Data-Driven Justice, and co-led the Precision Medicine Initiative. Immediately prior to the White House, he led the product team at RelateIQ prior to its acquisition by Salesforce.

DJ will be working with the Venrock investing team and advising Venrock portfolio companies on healthcare, security, data and consumer internet challenges and opportunities. His decades working in the tech industry, combined with his expertise in government, will be a great asset to the Venrock ecosystem.

Curious about cryptocurrency? Venrock’s David Pakman talks to Adi Sideman and Yonatan Sela about the upcoming launch of PROPS, a new cryptocurrency. The YouNow team pioneered mobile live video and they were the first to introduce an economy around interactive video, where on the one side people can buy a virtual currency, and on the other side, creators who perform can earn that currency. They discuss what led them to this point, and how YouNow is setting out to distribute network value broadly across users and break up the centralized control of media with the PROPS project.

Venrock is thrilled to announce that Tom Willerer will be joining us as a partner. Tom will be helping us expand our efforts in consumer technology, looking for entrepreneurs who dare to do something that others believe is impossible. Venrock has a long history of investing in early stage, consumer startups going back to Apple in the 1970s and recent success stories including Dollar Shave Club and Nest. The consumer space continues to be exciting as new brands create products and services that delight, and out-innovate the incumbents.

Tom brings nearly two decades of experience to Venrock, having co-led product innovation at Netflix during their massively successful transition from DVDs to streaming, and more recently, built products and teams at Coursera that helped 24x quarterly revenues. Tom has developed a passion for company building, not unlike the rest of the team at Venrock, and his experience will be an asset to our portfolio companies.

But there was also something less obvious in Tom that made us want to partner with him. As we got to know him and he interacted with people in our network, the feedback was not only positive, they wanted to hire him for themselves!

We’re thrilled that Tom wanted to partner with us too and look forward to building companies together.

I joined Netflix in 2007, just when we were launching streaming. We were a $1 billion market cap company, only available in the US and our members were all on DVD. When I left in 2013, we had skyrocketed to a much larger company with a $20 billion market cap. Our members were located all over the world and all were on streaming. Today, Netflix has over 100 million members around the world. Being a part of this transformation was exhilarating and I loved every minute of it, so much so that I wanted to do it again. This led me to join Coursera.

Four years ago, I joined Coursera as employee number 50. I’ve had the privilege of working on every aspect of the company, from the product, to the business model, to building the team and setting a culture. In four years we’ve been able to grow revenue nearly 50x, launch four fully accredited online degrees, roll out an enterprise sales channel, run thousands of AB tests, and build out a world-class product organization. I’m proud of what we’ve accomplished and confident in the team’s ability to continue to deliver outstanding results.

Knowing that Coursera is in good hands and on a positive trajectory has allowed me to step-back and consider what’s next for me. When I think about what really motivates me, I’ve realized that it is being in “startup mode”. That’s what I loved at both Netflix and Coursera, and that’s what I want to do exclusively. So I’m thrilled to announce that I’ve decided to join Venrock as a partner, focusing on early stage investments. I’m excited to take what I’ve learned scaling Netflix and Coursera to help entrepreneurs change the world. This is a natural evolution for my career – build a delightful product at Netflix, build a sustainable company at Coursera and now help many entrepreneurs change the world with their vision at Venrock.

What attracted me to Venrock are the people and the vision. The partners at Venrock are people that I think I can learn from and they are open to learning from me. That kind of reciprocal relationship is what makes a great team. I am equally inspired by the team’s vision. I loved what I heard from all of the partners, which is that they know they are doing their job if their entrepreneurs call them first, regardless of whether things are going well or poorly.

I’m naturally very curious, so I’m interested in almost everything: consumer, marketplaces, video, entertainment, subscription businesses, education, workplace productivity, career placement… I’m particularly interested in companies that can build a profitable long-term business and drive positive impact in the world. I believe some of the most interesting companies change the world and in the process create a very profitable business.

I’m proud of the strong team and culture of innovation I built at Coursera and can’t wait to partner with amazing entrepreneurs to help them do the same. If you’re an amazing entrepreneur, please reach out. I’d love to brainstorm with you and see how I and team Venrock can help!

Brian O’Kelley, CEO and co-founder of AppNexus, started his entrepreneurial endeavors early, first in high school refurbishing old Apple II computers and later in college creating websites in the nascent days of the internet. Venrock partner Mike Tyrrell talks to O’Kelley about his path from odd jobs to CEO of a $1 billion company. He discusses the tough times at Right Media that led to his firing, and how he turned that experience into a positive one with the founding of AppNexus. And in the tough times of building the business, O’Kelley shares how his commitment to the vision of programmatic advertising led him to keep pushing. He also discusses how he mentors employees and promotes company spirit through all things orange, even his polished toenails.

A model to help you evaluate consumer subscription businesses (download here)

Not every direct-to-consumer business should be a subscription service. Many try to be, and for good reason—subscription businesses often have more predictable revenue than other businesses, they allow you to acquire a customer once and then have a long-term paying relationship with them, and they can quickly create enormous enterprise value.

However, in evaluating whether this model is right for a particular business, entrepreneurs need to have an intimate understanding of the immutable force governing their success—churn. Having run and invested in quite a few consumer subscription businesses over the years (eMusic and Dollar Shave Club being the most well-known), I have put together a view on churn that I am happy to share.

As I have discussed before, one of the clear indicators DSC could be huge was their low churn rate. This was apparent even in the very early months of the service’s life. On the flip side, many of the meal kit services we looked at showed very high churn. As we will discuss below, this is the single most important factor predicting a service’s future success.

Are Subscriptions Right For You?

First, not every business or service should be sold using a subscription model. Customers tell us if they like buying our product via subscription by how many of them stay in the service versus how many defect. High churn businesses indicate customers would likely prefer another model, like a la carte sales.

For subscription services to have to become large venture-scale returns, two things must be true: (1) the churn rate must be low and, (2) the market size must be large. There are plenty of niche subscription businesses where customer lifetimes are long, but the population interested in them is small. Those businesses are typically hard to reach venture scale and be worth, say, half a billion dollars or more. Some examples of these include good old-fashioned magazines and wine-of-the-month clubs.

What is Churn?

Many subscription companies measure and report churn differently. To properly calculate churn, let’s first establish some definitions. Let’s assume the billing period for a service is monthly, but you can replace “monthly” with whatever your billing period is (ie, quarterly, etc.)

The purest and most complete way to calculate churn is to follow the formula below:

Average Net Monthly Churn = ((A+P)-W)/T

This gives you the rate at which customers are leaving your service as a percentage of the total customers in your service. You should calculate this each month as a total across all cohorts.

What is a Good Churn Rate?

Generally speaking, for consumer subscriptions services to become a large business, I look for average net monthly churn rates below 5%. The truth is, very few achieve this. Almost all of the consumer subscription businesses I have evaluated as potential investments have churn rates higher than this, and in some cases, much higher. The biggest subscription winners are below 5% per month, and usually well below 5%. (For example, Netflix is below 1% per month, Dollar Shave Club is very low, ISPs and Pay TV are also low with Dish at 1.5% per quarter, Verizon Wireless and AT&T are about 1.5%per quarter)

Why is a monthly churn rate much higher than 5% a problem? Well, think about your service as a bucket. Each month, you do some combination of paid marketing and organic customer acquisition to grow your business. Those new subscribers are placed in the top of your bucket. Churn is the hole in the bottom of the bucket. No matter how many new subs you put in the top, you continue to lose customers as they leak out of the bottom. Just to stay flat, you have to replace your churned customers. If a lot leak out, you have to spend/market more to fill the top.

The law of percentages has a nasty effect here as well—the bigger you get, the more customers you lose (and have to replace) every month. The larger your business gets, the bigger the holes in the bucket. A 10% monthly churn rate, when you only have 50,000 subs, means you only lose (and have to replace) 5000 subs a month. But 10% churn when you have 500,000 subs, means 50,000 new subs are needed per month, just to tread water.

A churn rate of 10% a month effectively means you lose (the equivalent) of all of your customers every 10 months. Those businesses are not sustainable. This is a hard point for some subscription novices to internalize—if you lose all of your customers each year, you do not have a good business. You might have a product or service that some customers want, but you are selling it to them in the wrong model. Your customers are telling you they don’t want to buy every month.

One common reaction to this point of view is, “Hey, if some of my customers stay and love the service, who cares if a bunch leave? I will just focus my marketing on more of the people who stay!” This is a fallacy. The basic methods of customer acquisition are all based on targeting to your best prospective customers. Churn is a reaction to your value proposition after people have tried your service. If it is high, you have a problem with the service, not with your targeting.

Period Churn and Cohorts

Many operators of subscription services will note that early customers churn at higher rates than customers who have been with you a while. Period churn is the amount of churn that happens in the same period for each batch of new customers, or cohorts. For example, first month churn is the average churn that occurs in the first month for all new customers. (Here is a good primer on cohorts.)

First period churn is always highest, period two is lower, period three usually lower still, and then things tend to steady-state for the remaining periods. The graph below illustrates a typical churn curve, expressing period churn, or the churn of customers in each of the monthly cohorts.

The math behind calculating period churn is as follows:

A = Number of new subs acquired in a month x

B = Number of subs remaining from A in month x+1

C = Number of subs remaining from A in month x+2 (you can include winbacks in C)

First Period churn = (A-B)/A

Second Period churn = (B-C)/B

etc.

Average Period Churn = the average of all similar Period Churn results (ie, all month 1 period churn results)

Cohorts are a great way to study how customers with similar tenures behave and where best to make improvements in your service. Obviously, reducing first period churn will have the biggest impact on your business. Why are so many people leaving in the first month and can we address their concerns?

In my experience, almost all subscription businesses follow a similar curve to the one above, albeit with different values along the periods. Focusing on early-period churn obviously pays the biggest dividends. Important to note—the fact that your service tends to steady-state in the out months is not unique to any one service.

How to Analyze Churn

I created a standard churn analysis worksheet that I use to analyze churn in subscription services. This template allows us to use standard definitions of churn rates and make sure we are comparing apples to apples when thinking through investments in new services. You can download a copy here. Just fill in all the colored cells (and you can extend the sheet to include more than seven periods). This worksheet calculates a number of useful pieces of data:

Average net monthly churn — this is the global expression of churn for your service.

Average churn for each billing period—this shows you how many users leave the service each billing period, on average

Churn for each billing period across your tracked cohorts—this helps you see whether newer users are exhibiting better or worse retention than older users.

Reducing Churn

There is a laundry list of optimizations subscription services implement to improve retention, and collectively these have a positive effect—re-billing insufficient fund accounts on the 15th and 30th of the month, allowing members to pause their service, allowing members to reduce the frequency of delivered goods, winback campaigns to churned members, etc. But a key observation about businesses which show high churn in their early stages is that the churn will not meaningfully reduce. That is, you can expect your optimization efforts to maybe move churn 1% — 2% (absolute points) or so, but they will never halve churn or reduce it dramatically beyond this. This is because churn is a statement from your customers about how habitually valuable your service is to them. In my experience, the only way to meaningfully reduce churn in high-churn businesses is to essentially redesign the service and the value proposition. For clarity, I have looked at close to a hundred subscription services and have never seen churn improve from, say, 12% a month to 7% a month without fundamentally changing the service…but I have seen it move from 12% to 10% or thereabouts through optimization.

In addition, churn can actually get worse over time as you scale up your customer acquisition efforts. Sometimes your enthusiastic early adopters were your very best customers and as you reach into more and more segments to find new users, the mass market users can turn out to be less loyal, hence churn can worsen.

High Churn Eventually Bites You

There are plenty of examples of high early growth combined with high churn rates. Investors got excited about the emerging high-growth meal kit market, probably because paid marketing was working very well. That is, in the early days, the services could buy customers for a CAC (customer acquisition cost) that is less than the margin LTV (lifetime value — the sum of all gross margin dollars over the lifetime of the customer) of every customer. This is good math, right? But when the churn is high, the company must spend more every month to refill the leaky bucket and eventually the business hits a wall. CACs continue to rise, total spending starts to get out of hand, and investors get scared. The business is forced to reduce marketing spending to reduce cash burn, starts to shrink, and then things get ugly.

A recent example of this is Blue Apron. Their average monthly churn appears to be quite high…perhaps as high as 12% per month. With one million total paid subscribers, they lose about 120,000 subs per month. The cost to replace these lost subs, just to stay flat and not grow, at an estimated CAC of $147, is $17.6 million per month. More recent CACs are $460, so they would spend more than $55 million per month just to tread water. You can see how this becomes unmanageable.

The Takeaway

High churn businesses (roughly greater than 5% per month) are not great businesses. As they grow, more of their marketing must be devoted to replacing churned customers. They eventually hit a point where shareholders lose patience with the amount of marketing spending necessary to fund growth. When marketing spending is reduced, if the churned customers are not replaced each month, the company can begin to shrink rapidly. This treadmill gets very hard to maintain and ultimately is the undoing of many high-churn subscription businesses. Things may look exciting in the beginning, but the leaky bucket always catches up with you eventually.

The recipe for success in subscription businesses is a combination of low churn and large applicable markets. If your churn is high, switch to a different model or redesign the offering to find a lower churn proposition.